The effect of aggressive working capital management policy on the performance of listed companies in Ghana

Abstract

Working Capital Management is an important part of the financial management activities of companies as it tends to have effect on liquidity and overall profitability of organisations. It is argued in finance literature that an optimal working capital enhances profitability. Traditional studies on working capital management have tried to prove this by examining the effect of working capital management on the profitability of companies. We deviate from this norm by examining the effect of aggressiveness of working capital management policy on the profitability of Ghanaian registered companies. Using the financial statements of 21 Ghana Stock Exchange listed companies covering the period 2006 to 2011, we examined how their return on equity and return on assets were influenced by the aggressiveness of the working capital policy. Data obtained was analysed using regression analysis. Our empirical results show a negative relationship between working capital management policy and the measures of profitability adopted. We conclude that management cannot increase profit by adopting a very aggressive working capital management policy.